Assuming the goal is more prosperity, lawmakers who work on tax issues should be guided by the “Holy Trinity” of good policy.
- Low marginal tax rates on productive activity such as work and entrepreneurship.
- No tax bias (i.e., extra layers of tax) that penalizes saving and investment.
- No complicating preferences and loopholes that encourage inefficient economic choices.
Today, with these three principles as our guide, we’re going to discuss a major problem in how dividends are taxed in the United States.
Simply stated, there’s an unfair and counterproductive double tax. All you really need to know is that if a corporation earns a profit, the corporate income tax takes a chunk of the money. But that money then gets taxed again as dividend income when distributed to shareholders (the people who own the company).
So why is this a bad thing?
From an economic perspective…
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